From the May 2007 issue of Boomer Market Advisor • Subscribe!

New techniques for boomer benefactors

From covering the cost of a child's college education to accumulating enough assets to last through retirement, it's hard to fault baby boomers for putting charitable giving on the back burner.

But techniques are now available to make charitable giving more affordable and, thus, more of a priority. Boomers are finding that they can satisfy their charitable-giving urges, and in doing so, address other pressing needs. For instance, securing a guaranteed income stream for life and reducing their tax exposure while passing their values and money-management skills to the next generation.

For advisors with boomer clients who possess a philanthropic sense of duty, it's never too early to start talking about the most viable strategies for doing so -- and the benefits that come with it.

Family foundations

More boomers are using family foundations to express their benevolence, says David Schlossberg, CEP, president of Assured Concepts Group, an estate and financial planning practice in East Dundee, Ill. Once a tool used almost exclusively by the very wealthy, the family foundation lately has emerged as a practical choice for middle-income families. "It's now popular even for modest amounts of giving," he says.

One appealing aspect for clients is that the money management and distribution activities are controlled by a board of directors that may include their children. Thus, parents have a vehicle through which they can instill the values of charity, philanthropy and financial responsibility in the younger generation.

"That's a wonderful overarching benefit," says Joel Javer, CLU, CFP, principal at Sharkey, Howes & Javer in Denver.

The foundation is created as a tax-exempt organization that receives funding primarily from a person or family. The directors or trustees of the organization (usually family members) determine which charities will receive donations. Each year the foundation must distribute at least 5 percent of its assets to charity. Schlossberg notes that the foundation also can be an income source for people who sit on its board.

"Say you have $1 million in assets in the foundation and it's earning at a rate of 9 percent per year," he explains. "That's $90,000 coming in but a minimum of $50,000 going out [to meet the 5 percent requirement]. So they have an extra $40,000 to use to compensate kids on the board, if that's the route they want to go."

Charitable remainder trusts

Charitable giving techniques by boomers often involve a transfer of ownership in low-basis assets -- stocks, a business, real estate holdings, etc. The assets' value has appreciated since their original purchase and keeping them will result in major capital gains exposure. By contributing highly appreciated securities to a foundation or trust, the donor not only fulfills his charitable wish, but also gets a deduction for the full fair market value of the assets. As an added benefit, capital gains are avoided on the amount the assets have appreciated.

"You see it a lot with clients who have a low-basis stock they don't want to pay capital gains tax on," Javer says. "Instead, they give it to charity. The charity sells the stock, keeps the proceeds and doesn't have to pay capital gains taxes on the transaction."

Peter Kote, founder of Professional Fiduciary Services, a Laguna Hills, Calif., firm specializing in planning giving strategies, often steers clients toward a charitable remainder trust if the highly appreciated asset is in a business or real estate. The CRT provides the donor with a defined payment stream for a defined period (usually the death of the donor and/or his spouse). At the end of that period, the charity receives what's left of the assets.

What's noteworthy about the CRT, he says, is that it gives the donor the ability to transfer a percentage of a specific property to the trust.

"The impression many people have is that they have to give the whole property," Kote explains. "That's not the case. You need to run the numbers to determine what percentage of the property would have to be donated to the trust to zero-out capital gains tax. It can work out well for baby boomers because it provides capital gains tax relief, a source of income for life, an immediate tax deduction and [if it involves a rental property] they're done with tenants and toilets."

Irrevocable life insurance trusts

The CRT is one tool that puts a charitable donation to work in order to reduce current income tax liability. Another is the irrevocable life insurance trust. One common strategy involving an ILIT has a client transfer ownership of an annuity contract to the trust, which in turn annuitizes the contract, using the payments to purchase and fund premiums on a life insurance policy (typically a permanent, survivorship policy with a guaranteed premium). The trust owns the policy, the donor is the insured and the donor's charity of choice is the beneficiary.

Income earned by the annuity is no longer part of the donor's estate, so if the ILIT is properly structured, the estate shouldn't be liable for any taxes on those assets. But there are more immediate benefits that can make such a strategy especially appealing to boomers, Schlossberg says.

"The bonus [for the donor] is the immediate income tax deduction for the future gift [the death benefit], subject to certain requirements. And that deduction can be carried forward for up to five years."

Such a strategy provides clients with flexibility to use the tax deduction in a number of ways.

"We might take advantage of the deduction by moving assets from a traditional IRA to a Roth IRA in the same tax year when they're claiming the deduction," Schlossberg adds.

The deduction helps offset any immediate additional tax liability created by the move. Having assets in a Roth IRA instead of a traditional IRA provides substantial benefits to the accountholder when he's eventually required to take distributions.

According to Javer, advisors with charitably inclined boomer clients also should be aware of tax credits and other incentives offered at the state level.

"Here in Colorado, people who give to certain organizations can get a 50 percent income tax credit. For someone in the 30 percent tax bracket who gives $1,000 to one of these organizations, the donation basically costs them just $200. That's pretty powerful."

Donor-advised funds

For charitably inclined clients who prefer to avoid the complexity and costs associated with family foundations and trusts, alternatives are available. Offered by an increasing number of fund companies, donor-advised funds are structured like mutual funds and allow clients to earmark the organizations to which they'd like their charitable donations to go. The donor simply writes a check to the fund, explains Javer, and specifies to the fund manager how that money should be distributed, earning an upfront tax deduction in the process.

Whatever the technique, a number of proven, low-cost strategies now exist that create retirement income streams for the living, while ensuring a legacy not only for heirs, but for society as a whole.

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